Moody’s warns of weaker remittances

A prolonged fall in remittances from Gulf Cooperation Council (GCC) nations could partly offset the benefits of lower oil prices and hurt economic growth in recipient Asia Pacific countries like the Philippines, Moody’s Investors Service warned.

In a new report titled “Sovereigns — Asia Pacific: Falling Remittances from the Gulf Dampen Benefits of Lower Oil Prices,” Moody’s analyzed the potential credit implications of weaker remittances from their citizens working abroad for six Asian countries: the Philippines, Bangladesh, India, Pakistan, Sri Lanka, and Vietnam.

The debt watcher said lower remittances from Gulf Cooperation Council (GCC) economies, which have been hit hard by the slump in oil prices, would reduce the benefits of cheaper oil imports for several Asia Pacific countries.

Moody’s analysis showed that growth in remittances moved roughly in line with oil prices, noting that during periods of rising oil prices, worker remittances increased significantly.

“For instance, between 1999 and 2008, when oil prices increased by over 24 percent annually, remittance outflows from the GCC rose by close to 10 percent, outpacing outflows from the US, the second-largest remittance source country,” it stated.

Looking ahead, the credit ratings firm does not expect to see a bounce back in oil prices, noting that employment growth in the Gulf to remain relatively subdued.

“Therefore, our forecast is that remittances will likely either decline or grow much more slowly over the next few years,” it said.

With this, Moody’s said prolonged fall would also hurt economic growth, given the importance of remittances to household incomes.

The report pointed out, however, that diversifying the vocations of overseas workers and their destination countries could help to mitigate this.

The report finds that while previous oil price shocks had limited and short-lived effects on remittances to Asian countries, the current more pronounced and prolonged decline, because it is coupled with fiscal tightening in many oil-exporting countries, is likely to hurt migrant worker earnings and consequently remittances.

“All the sovereigns in our analysis are net oil importers, meaning that a lower oil import bill should mitigate the impact of the decline in remittance inflows on the current account,” it said.

The credit watchdog pointed out that 25 percent drop in oil prices since the start of 2015 is large, and it expects that future declines in remittances will be much lower than that in percentage terms.

“So, unless remittances decrease significantly more in percentage terms than we anticipate, their decline will dampen, but not completely offset, the benefits of lower oil prices on the current account,” it noted.

Moody’s estimates that it would take a 10 percent to 30 percent fall in remittances to outweigh a 50 percent drop in net oil imports for most countries.

“Pakistan, Bangladesh, Sri Lanka and the Philippines have the highest proportion of remittances in their current account receipts. A fall in inflows will thus impact these sovereigns most,” it added

The credit ratings firm said the base case of oil prices remaining lower for longer implies that the impact of weaker remittances will ultimately extend to more subdued consumption and economic growth.

Mitigation
Nevertheless, for the Philippines, India, and Vietnam, the diversified locations and vocations of their overseas workers could help reduce the overall decline in remittances, it said.

In the Philippines, it noted that between 2010 and 2013, growth in the number of Filipinos migrating to the US has been far outpaced by deployment to the Middle East.

“But the proportion of remittance inflows from the US and GCC are nearly equal, at 34 percent and 31.7 percent, respectively,” it said.

For the Philippine and Vietnam, Moody’s said growth in inflows from the US could offset slower remittances from the Gulf, if the US recovery gathers steam.

Another factor is the occupational profile of overseas workers, it said.

For both India and the Philippines, the relatively diverse occupations of their workers should provide a buffer against an oil-related slowdown in remittances.

“Overseas Filipinos are engaged in a wide range of jobs, including domestic work, hospitality, medical services and engineering. Workers in such professions are much less likely to see an impact from the slowdown than those in the construction or oil and gas industries,” it said.

Lastly, Moody’s said several factors could also mitigate the impact on consumption, as domestic drivers of growth can help to pick up the slack that a fall in remittances could bring.

“In the Philippines, for instance, the business process outsourcing industry is a strong complement to remittances as a revenue generator,” it stressed.